How high can we go? Market waits for Fed decision

Federal Reserve (Fed) chair jerome powell speaks about the market.
Federal Reserve Chairman Jerome Powell

The European Central Bank (ECB) met July 25th, signaling more easing measures ahead in this slowing market. The central bank said it aims to maintain rates “at their present or lower levels”, foreshadowing a possible rate cut on the horizon.

ECB President Mario Draghi said that “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion.”

The ECB said it was considering economic stimulation options, “such as the design of a tiered system for reserve remuneration, and options for the size and compensation of potential net asset purchases.” In other words, banks will be charged lower fees for holding reserves at the ECB,

Draghi also mentioned that the risk of a recession in the region was low. The euro appreciated to $1.1153 after this message was delivered.

Euro stocks rose after the ECB met, with the pan-European Stoxx 600 closed .4% higher

The Fed in the hot seat

Investors are predicting with 80% certainty the Federal Reserve will announce a rate cut after its meet July 31st. The messages received from Federal Reserve Chairman, Jerome Powell as he spoke to congress, continued the ‘dovish’ narrative the Fed has regarding its monetary policy.

When speaking to congress, Powell informed the house that the Fed will do whatever is “appropriate” to sustain the economic expansion.

He later expressed his concern for the global economy and slowed growth. “Growth indicators from around the world have disappointed on net, raising concerns that weakness in the global economy will continue to affect the U.S. economy.”

Will the consensus get it right?

The market is pricing for a rate cut and the S&P 500 is reaching higher highs. With the current data available. some investors think the rate cut is for ‘insurance’ to avoid economic downturn.

Michael Reynolds, investment officer at Glenmede, said, “The Fed is trying to be proactive.”

“The way we view an insurance rate cut is, it’s a proactive move to protect against what seems to be potential but unpredictable risks.”

An insurance cut is a way of easing when the Fed sees no risk of inflation and the economy is still in good shape. Business can still flow, but with a bit of ease.

The one question investors can’t find the answer to is how the rate cute will impact the economy. What we already know is that banks can borrow at a cheaper rate. Although, if the Fed has to act in an recession, they limit the room they have to work with for lowering interest rates.

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